A court of appeals in Kentucky has ruled on a case concerning the issue of construction defects being an occurrence under the terms of a general liability policy. The case is Motorist Mutual Insurance Company v. Cincinnati Insurance Company, 2008 WL 746689 (Ky.App.). Note that this case is not reported in S.W.3d.

In 1994-95, Elite Homes, Inc. built and sold a house to the Mintmans. At the time, Elite was covered under a comprehensive general liability policy issued by Motorists Mutual. Effective July 1, 1996, Elite procured a commercial liability policy from Cincinnati Insurance. In 2001, the Mintmans filed a lawsuit against Elite alleging serious latent structural defects as a result of substandard work performed by Elite. The case was referred to both Motorists and Cincinnati insurance companies.

Motorists defended Elite and paid $130,000 to settle the claim. Then, Motorists filed a third-party complaint against Cincinnati to recover the settlement payment plus other fees and costs. Cincinnati filed a summary judgment motion saying that the claim by the Mintmans did not qualify as an occurrence. Cincinnati said that faulty workmanship did not qualify as an occurrence because it was not an accident. The trial court agreed with Cincinnati and the ruling was appealed.

The appeals court took note of rulings from other jurisdictions which came down on both sides of the issue. Cases from Wisconsin, Pennsylvania , and a United States District Court were reviewed and analyzed. In the end, this Kentucky court of appeals ruled that the damage to the Mintmans' house was clearly caused by an occurrence since the damage was undoubtedly accidental in the sense that it was not intentional on the part of Elite. The decision of the trial court was vacated and the matter was remanded to that court.

Duty to Defend Additional Insured

The Court of Appeals of New York was asked to decide, within the context of a comprehensive general liability insurance policy, whether liability must be determined before an additional named insured is entitled to a defense in an underlying personal injury action. The case is BP Air Conditioning Corporation v. One Beacon Insurance Group, 2007 WL 1826923 (N.Y.), 2007 N.Y. Slip Op. 05581.

In this case, Henegan Construction was the general contractor and subcontracted the HVAC work to BP Air Conditioning. BP subsequently subcontracted the work to Alfa Piping Corporation. Alfa agreed to hold BP harmless and to name BP as an additional insured on its general liability policy. One Beacon Insurance Group issued the policy to Alfa and issued an additional insured endorsement.

An employee of another subcontractor hired by BP was allegedly injured when he slipped and fell on an oil slick that had originated from a machine used to cut and thread pipe at the work site. The employee sued Henegan who then brought a third-party action against BP and Alfa. BP tendered its defense to One Beacon which declined to defend BP. BP then sought a summary judgment seeking an order requiring Beacon to defend it in the underlying action. Beacon opposed this, contending that it was not obligated to defend BP until it was liability was determined. The trial court granted BP's motion for summary judgment and this appeal followed.

The court of appeals noted several points pertaining in general to the duty to defend. First, it was well settled that an insurer's duty to defend is exceedingly broad, and an insurer will be called upon to provide a defense whenever the allegations of the complaint suggest a reasonable possibility of coverage. And, if a complaint contains any facts or allegations that bring the claim even potentially within the insurance protection purchased, the insurer is obligated to defend. Moreover, it is immaterial that the complaint against the insured asserts additional claims that fall outside the policy's general coverage or within its exclusory provisions.

When it came to the duty to defend an additional insured, One Beacon wanted the court to consider not applying these general points, but rather adopt a different standard that requires a determination of liability before an additional insured is entitled to a defense. The court declined to do so. The court of appeals said that an additional insured enjoys the same protection as the named insured. The standard for determining whether an additional insured is entitled to a defense is the same standard that is used to determine if a named insured is entitled to defense.

Other Insurance Clauses in Conflict

An appeals court in Indiana has addressed the issue of whether other insurance clauses in the policies of two different insurers are mutually repugnant, thus requiring each insurer to be liable for a pro-rated amount of the damages. The case is McMurray v. Nationwide Mutual Insurance Company, 2007 WL 4555283 (Ind.App.).

In 2003, McMurray was riding in the passenger seat of a vehicle owned by Richards and driven by the owner's son. Winkler collided with the vehicle; she was driving a car owned by Coffey. McMurray's injuries were in excess of the insurance limits for Coffey's vehicle and so, McMurray sought compensation for underinsured motorist benefits from Nationwide (which was the insurer for Richards), and from his own insurance carrier, GuideOne. Both policies carried other insurance clauses.

McMurray sought a declaratory judgment as to his rights to underinsured motorist coverage under the Nationwide policy. Nationwide sought a judgment that McMurray was not an insured under the underinsured motorist coverage because he had similar underinsured motorist coverage under GuideOne's policy. And GuideOne sought a declaratory judgment that Nationwide's coverage for McMurray was primary and its coverage was excess.

The trial court ruled in favor of Nationwide and this appeal followed.

The appeals court saw this as a controversy between two insurance companies as to which is primarily liable for providing underinsured motorist benefits to McMurray. The other insurance clauses of the two different policies held the key to solving the controversy.

The court noted that there are three basic types of other insurance clauses. One is a pro-rata clause restricting liability on concurring insurers to an apportionment basis. A second type is an excess clause that restricts liability upon an insurer to an excess coverage after another insurer has paid up to its policy limits. And the third type is an escape clause that avoids all liability in the event of other insurance. In this case, Nationwide had an escape clause and GuideOne had an excess clause.

The court said that competing clauses between insurers should not be allowed judicial sanction at the expense of removing the insured's coverage. In other words, the other insurance clauses in policies insured should not be used to leave the insured with no coverage at all. And there are three ways to make sure this did not happen: first, give effect to one policy provision over the other; second, apply mechanical or arbitrary rules; or third, hold both clauses to be conflicting and mutually repugnant and so, disregard both. The court chose the last course of action.

Choosing the third way, the court felt, provided indemnification for the insured, and also gave effect to the general intent of the insurers. After all, if neither policy contained the other insurance provision, then each insurer would have been liable in a pro-rated amount up to the respective policy limits. Moreover, the court noted that Indiana law was clear that when insurance coverage provisions are mutually repugnant, they should be ignored, and each insurer should be liable for a pro-rated amount of the resultant damage, not to exceed its policy limits.

The decision of the trial court was reversed and the case was remanded for proceedings consistent with this opinion.

The Running of Applicable Statutes of Limitations

This case is presented mainly to clarify when the statute of limitations begins to run in North Carolina when the claim is based on negligence, fraud, constructive fraud, breach of contract, breach of covenant of good faith and fair dealing, unfair and deceptive trade practices, and breach of fiduciary duty. The case is Piles v. Allstate Insurance Company, 653 S.E.2d 181 (N.C.App. 2007).

The case involved underinsured motorist (UIM) coverage and the claim of the insured that someone impermissibly signed the claimant's name to a selection/rejection form for uninsured motorist coverage. The form rejected combined uninsured motorist/underinsured motorist coverage and selected only uninsured motorists coverage. When the claimant was involved in an auto accident and sought UIM coverage, the claim was rejected due to the rejection form and she filed a lawsuit. The trial court dismissed the lawsuit as time barred and this appeal followed.

The appeals court said that the application of any statutory or contractual time limit requires an initial determination of when that limitations period begins to run; a statutory limitations period of a cause of action necessarily cannot begin to run before a party acquires a right to maintain a lawsuit. And, with respect to the claims made here, especially with respect to the claim for fraud, accrual begins at the time of discovery, which is the actual discovery or the time when the fraud should have been discovered in the exercise of due diligence.

The critical dates in this action are when the claimant discovered or reasonably should have discovered the alleged fraud or negligence. Moreover, this is a question of fact for a jury based on the facts of the particular case. The ruling of the trial court was reversed.

Matching Issue under Homeowners Policy

The Superior Court of Pennsylvania recently addressed the issue of matching. The question answered by the court was whether an insured is entitled to have its entire roof replaced when part of the roof is damaged as a result of a covered loss and matching shingles cannot be obtained; the homeowner policy language provided replacement of that part of the building damaged and for like construction and use. The case is Greene v. United Services Automobile Association, 936 A.2d 1178 (Pa.Super. 2007).

The evidence showed that the Greenes' initial loss occurred due to a water leak through the skylights in the roof. An investigation of the loss revealed roof damage due to wear and tear and possible storm damage. There were three missing shingles. The insureds said that the entire roof had to be replaced because the present shingles were no longer manufactured. The insurer did not agree and when the matter ended up in court, the trial court agreed with the insurer.

Upon appeal, the Greenes pointed out that the homeowners policy required the insurer to provide replacement cost for that part of the building that was damaged, and that the replacement cost shall not exceed that which is necessary for the like construction and use. The insureds claimed that the part of the building that was damaged was the roof, and because the damaged shingles on the home were no longer in production, like construction meant an entirely new roof and not a roof with mismatched shingles.

The appeals court noted that the policy clearly and unambiguously requires the insurer to pay the replacement cost of the part of the building damaged. However, it found the insureds' interpretation of the policy language unreasonable and absurd. Quoting from the trial court's view, the appeals court said, “to utilize the insureds' logic would necessitate replacing all siding when one piece of siding is damaged, or an entire door when a door knob is damaged. It defies common sense.”

Furthermore, it was found that although the exact shingles that were damaged were no longer available, shingles of similar color and structure were available and could have been used to repair the damaged part of the roof. And this helped the court to decide that, while the policy clearly and unambiguously provides for like construction, replacement with the identical item is not required. The repair of the roof with shingles similar to the damaged shingles in function, color, and shape meets the parameters of like construction as called for by the policy language. The decision of the trial court was affirmed.